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A limited life for insurers’ regulations - significant reform proposals announced for retail life insurers

A significant shake-up in the regulation of Australian life insurers is likely, with Assistant Treasurer Josh Frydenberg MP welcoming an industry led law reform package from the Association of Financial Advisers, Financial Planning Association and Financial Services Council.

The catalyst for these developments was ASIC’s comprehensive review last year of 202 advice files from retail life insurers, finding that in 37% of cases the financial services licensee did not comply with financial services law. Amongst other things, ASIC’s report recommended insurers:

address misaligned incentives in distribution channels;

address lapse rates on an industry-wide and insurer-by-insurer basis (e.g. by considering measures to encourage product retention); and

In short, the industry package proposes a new remuneration model, development of a code of conduct, changes to the Approved Product Lists and an ASIC review of Statements of Advice with a view to making disclosure simpler and more effective. More comprehensive changes are already being foreshadowed by the industry, however, with a media release issued by the Financial Services Council notes that “if there [are] no significant changes to consumer outcomes within three years, the industry [will] go further by either moving to a fee-for-service or level commission model”.

Corrs will continue to monitor these significant changes. A summary of the industry reform package prepared by the Association of Financial Advisers appears at the end of our article. Should you have any queries regarding these important developments do not hesitate to contact us. Corrs is able to assist in the implementation and ongoing management of these significant reforms if enacted.

ASSOCIATION OF FINANCIAL ADVISERS SUMMARY

Adviser and licensee remuneration

Maximum total upfront commission of 60 per cent of the premium in the first year of the policy, from 1 July 2018

Maximum ongoing commission of 20 per cent of the premium in all subsequent years from 1 January 2016

Three year retention (‘clawback’) period, to commence from 1 January 2016 to apply as follows

in the first year of the policy, to 100 per cent of the commission on the first year’s premium;

in the second year of the policy, to 60 per cent of the commission on the first year’s premium; and

in the third year of the policy, to 30 per cent of the commission on the first year’s premium.

Ban on other volume-based payments from 1 July 2016, with appropriate grandfathering arrangements, consistent with the Future of Financial Advice.

Life insurance companies to offer fee-for-service insurance products to support advisers who wish to operate on a fee-for-service basis.

Transitional arrangements

Maximum total upfront commission of 80 per cent of the premium in the first year of the policy from 1 January 2016.

Maximum total upfront commission of 70 per cent of the premium in the first year of the policy from 1 July 2017.

Maximum total upfront commission of 60 per cent of the premium in the first year of the policy from 1 July 2018.

Quality of advice and insurer practices

Government to consider measures to widen Approved Product Lists by 1 July 2016.

Life Insurance Code of Conduct to be developed by the FSC by 1 July 2016. Similar to existing codes for Banking and General Insurance, the Code would set out best practice standards for insurers, including in relation to underwriting and claims management.

Better enforcement and monitoring

Ongoing reporting by life insurance companies of policy replacement data to ASIC to commence 1 January 2016.

Government to conduct a review of these measures by the end of 2018.

Industry efficiency

ASIC to review Statements of Advice, with a view to making disclosure simpler and more effective.

Government to consider developing a mechanism to rationalise life insurance legacy products, consistent with recommendation 43 of the Financial System Inquiry.

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